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Aarati Krishnan

THE route is circuitous, but chemical giant Bayer AG may manage to hike its stake in its Indian subsidiary, Bayer India, when the latter's proposed merger with Bayer CropScience goes through. Post-merger, the German parent's stake in Bayer India will go up from 55.3 per cent to 75.1 per cent. Consequently, domestic shareholding in the company will be down to 24.9 per cent from 44.7 per cent.This week, the board of directors of the two companies cleared a merger proposal under which Bayer CropScience India (formerly known as Aventis CropScience India) will be merged with Bayer India. Bayer CropScience shareholders will receive five Bayer India shares for every three held. How does this merger impact the promoter holding?

It's simple arithmetic. The German major holds 89.68 lakh shares (face value of Rs 10 per share after the proposed stock-split) in Bayer India, making it a 55 per cent subsidiary. Bayer CropScience is an 88 per cent subsidiary where the parent holds 124.17 lakh of the total 139.67 lakh shares outstanding.

As per the merger ratio, the Bayer group will receive 206.95 lakh Bayer India shares in exchange for its holdings in CropScience. This will take its total holdings in the merged company (Bayer India) to 75.1 per cent (296.63 lakh shares). Not related to market prices

While the swap ratio increases the German major's stake in Bayer India, it is out of sync with the current market prices of the two stocks on the bourses. The Bayer CropScience stock trades at around Rs 165, while the Bayer India stock trades at Rs 1,190 (The current face value of the stock is Rs 100, but is slated to be split into 10 shares with Rs 10 face value, before the merger). If the merger goes through, Bayer CropScience shareholders can exchange every three of their shares (presently worth Rs 495) for five shares of Bayer India. Going by the current market prices, these would be worth Rs 595. The arbitrage opportunity created by the swap ratio may see the Bayer CropScience stock rise, or the Bayer India stock fall, in the run-up to the merger.

Operational benefits

The hike in promoter stake apart, the merger does bring big operational benefits for Bayer India. Bayer India's crop protection business will expand from Rs 415 crore to Rs 725 crore (based on 2002 numbers). With a 28 per cent post-merger share of the agrochemicals market, the company may emerge as the leading player ahead of Rallis India. CropSciences' strong insecticide brands will be a good complement to Bayer's existing product basket in herbicides and fungicides.

With the merger, Bayer India will also acquire a presence in the promising genetically modified (GM) and hybrid seeds business through Proagro, the seeds arm of Bayer CropScience. With GM seeds emerging as a challenge to marketers of traditional agrochemicals market, this may prove a welcome addition to Bayer India's product portfolio that now comprises mainly of traditional agricultural chemicals.

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